LPL Financial Holdings Inc (LPLA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings first quarter earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Trap Kloman, you may begin.

Thank you, Nicole. Good afternoon and welcome to the LPL Financial first quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance. Following his remarks, Dan Arnold, our Chief Financial Officer, will speak to our financial results and capital deployment. Following the introductory remarks, we will open the call for questions. We would appreciate if each analyst would ask no more than two questions each. Please note that we have posted a financial supplement on the Events section of the Investor Relations page on LPL.com.

Before turning the call over to Mark, I would like to note that comments made during this conference call may incorporate certain forward-looking statements. This may include statements concerning such topics as earnings growth targets, operational plans, and other opportunities we foresee. Underpinning these forward-looking statements are certain risks and uncertainties. We refer our listeners to the Safe Harbor disclosures contained in the earnings release and our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of these measures, please refer to our earnings press release.

With that, I'll turn the call over to Mark Casady.

Thank you, Trap, and thank you, everyone, for joining today's call. Today, I'll share insight into our first quarter performance and the industry trends supporting our growth. We wanted to provide additional insight into our business for shareholders so today I'll focus on opportunities in our financial institutions channel. I'll conclude by sharing an update on our management team and corporate governance enhancement.

In the first quarter, we generated record adjusted earnings per share of $0.69, up 8% year-over-year. This growth benefited from strong revenue growth of 12% as well as ongoing share repurchases, which had lowered our fully diluted share count by 4 million shares over the past 12 months. We produced a record $141 million in adjusted EBITDA for the first quarter. The adjusted EBITDA margin declined 93 basis points year-over-year to 13%, primarily due to further decreases in the fed funds rate and the repricing of certain ICA contracts. Excluding cash sweep revenue which declined $8 million, adjusted EBITDA margins remained flat year-over-year. After a slow beginning to the quarter, advisor additions accelerated in March.

Looking forward, we see this momentum continuing as our pipeline remains strong with a diverse array of independent producers, financial institutions, RIAs, and Retirement Plan Advisers. We maintained excellent production retention of 96%, which includes the departure of a large financial institution with 40 advisors. Under these conditions in the first quarter, we attracted 53 net new advisors. We are confident in the strength and sustainability of our business model and the long-term migration of advisors to the independent channel.

I'd now like to comment on our financial institutions business and the many growth opportunities that lie ahead for it. Back in 2007, we recognized an opportunity to expand our presence in that marketplace and further diversify our revenue.

We sought a dedicated management team and an industry leading value proposition built upon the strength of our self-clearing and integrated technology platform to partner with banks and credit unions to grow their business and manage complexity. Having defined the opportunity, we acquired a leading independent financial institution broker dealer, UVEST, to achieve speed to market. Combining our offerings established us as a clear leader in providing brokerage and advisory solutions to banks and credit unions in the marketplace. Today, this business is led by Andy Kalbaugh, who has over 25 years of industry experience and 7 years with LPL. We currently support over 2,200 advisors across 735 banks and credit unions.

The IS channel provides us with a steady revenue stream as the investor portfolio tends to be more conservative and less sensitive to market volatility. In 2013, IS advisors generated over $600 million in commission and advisory fees representing 18% of our total production revenue. In addition, our IS channel also provides custom clearing services to insurance broker dealers enabling us to support approximately 4,000 incremental advisors. As we implement our corporate strategy to leverage our leadership in this market, we have identified four key opportunities in the institutional services business line. First, we see multiple opportunities to sustain net new advisor growth. One of the key value propositions we provide is identifying and placing new advisors in existing branches to serve additional bank customers.

We estimate that the financial institutions currently within our IS channel have capacity to add over 400 advisors, representing a long-term growth opportunity in the coming years. Based on third-party research, we are a leading destination for banks and credit unions with 33 new relationships joining in 2012 and 23 more in 2013. Through these combined efforts, in 2013 we added 119 net new advisors in the institution channel with 45 of these advisors represent an incremental headcount growth within existing institutional relationships.

Second, we are beginning to experience more meaningful growth in fee-based business, which generates higher margins compounding our growth. Currently, only 12% of the $80 billion in financial institution assets are in fee-based accounts. This compares to 35% in fee-based accounts for LPL overall.

Driven by our continued business consulting efforts, we are seeing strong momentum in the adoption of fee-based business as advisory assets in our IS channel grew 23% in 2013 to $9 billion in total assets.

Third, in addition to taking market share, we also see the financial institution market expanding. Due to increased regulatory and capital constraints on core banking operations, more financial institutions are seeking to develop alternative revenue sources including wealth management services to grow their business and retain customers. Increasingly, many larger banks are looking to outsource their broker dealer operations as they are not at scale in their ability to manage those regulatory and technology costs associated with operating a broker dealer.

Combining these opportunities can expand the existing market by 60% adding $900 million in production revenue to the marketplace in the coming years. And finally, the newest area of opportunity for growth is our bank wealth initiative. Like our hybrid RIA strategy, we envision this initiative of providing a unique solution through a completely integrated investment and operating platform. The solution is intended to allow banks to combine their retail investment and trust department wealth management needs in a single environment. As a result, banks would be able to expand their investment capabilities and gain greater operational efficiencies.

We believe this offering would strengthen the relationships we have with our bank partners and provide an entry point for us to penetrate the $2 trillion in invested assets on the trust market. Through our existing bank relationships and the service capabilities we acquired over the prior three years, we have what we need to develop this solution and we are prepared to take our unique end-to-end solution to the market. These four opportunities position us for continued success and reflect our ability to grow our business. Most importantly, we value our relationship with our financial institutions to partner with them to deliver sustainable growth.

Let me conclude with an update on our management team and several important corporate governance measures. This month we promoted Bill Morrissey to lead our Independent Advisor Services business and manage the recruitment, retention, and growth of our independent advisors. Bill has been with LPL for 10 years and previously served as Executive Vice President of Business Development helping to nearly double the number of advisors and launch our hybrid RIA platform over that time. Bill will report directly to our President, Robert Moore. Our ability to fill this position internally is a testament to the depth of our management team and the maturation of our leadership development programs.

Regarding our corporate governance, we recently adopted several best practices to strengthen our accountability to shareholders. As an example, we have proposed that shareholders approve the declassification of our Board at our upcoming Annual Meeting so that all directors would serve one-year terms rather than staggered three-year terms. Additionally, we implemented an executive compensation callback policy that enables the recruitments of incentive compensation in the event of a restatement of our reports as well as simplified executive stock ownership guidelines. In addition, we adopted more robust stock ownership guidelines for our directors. We believe these corporate governance enhancements promote long-term shareholder value.

With that, I'll turn the call over to our CFO, Dan Arnold, who will review our financial results and outlook in greater detail.

Thank you, Mark. This afternoon, I'll be discussing four main themes. First, I'll address the fundamental drivers behind our revenue in the first quarter, including details on advisor productivity. Second, I'll review our progress in managing our expense structure. After that, I'll discuss how these factors are contributing to our bottom line results. And finally, I'll conclude my remarks with a summary of our capital management activity.

In the first quarter, we generated revenue of $1.1 billion representing 12% growth year-over-year. This growth was driven by sustained advisor productivity, market appreciation, and net new advisor growth. These factors led to growth in asset levels, which rose 13.5% year-over-year to $447 billion and AUM per advisor climbing from $29.5 million to $33 million during that time period. Sustained investor engagement this quarter contributed to strong advisor productivity as measured across both net new advisory assets and commissions per advisor. Advisors generated a record $4.4 billion in net new advisory asset flows representing 11% annualized growth. With the added benefit of market appreciation, advisory assets grew 21% over the last year to $158 billion as of the end of the quarter.

Driven by growing investor demand and enabled by our robust and scalable fee-based offering, utilization of advisory services by our advisors continues to expand. As a result of this trend, fee-based assets have doubled from $6 million per advisor in early 2008 to $12 million per advisor today. Going forward, we expect advisory AUM to steadily grow beyond the current 35% of our total AUM as it represents over 50% of new sales. This trend benefits our performance in three ways. First, it contributes to advisor productivity as advisors are able to effectively expand the capacity of their practice to manage more assets; second, it expands our reoccurring revenue stream, which now stands at 67%; and third, it enhances our margins based on the advisory platform strong return on asset.

Commission based business also performed well in the first quarter. Excluding the elevated levels of alternative investment sales, commissions per advisor were $152,000, up 4% year-over-year and 1% sequentially. We feel good about this sustained level of baseline performance as investor engagement remains strong. The level of liquidity events that propelled alternative investment activity in the second half of 2013 was subdued this quarter. As a result, a portion of alternative investment sales associated with these liquidity events declined sequentially from $12,000 per advisor in the prior quarter to $4,500 this quarter. This lower level of activity also resulted in declining levels of marketing allowances, which flow through other revenue.

Based upon our current outlook on the timing of future alternative investment liquidity events, we see the second quarter alternative investment sales in line with first quarter results. Turning to our cash sweep program, revenue declined $8 million year-over-year and decreased $4 million compared to the fourth quarter of 2013. These headwinds were largely driven by ICA fees from bank contracts compressing 17 basis points over the last 12 months and 6 basis points sequentially. In addition, the fed funds rate declined 7 basis points and 1.5 basis points over the same time period. Looking forward and in line with prior messaging, we anticipate 1 basis point to 2 basis points of further bank fee reduction over the next three quarters excluding any change in the fed funds rate.

The earnings potential from this program continues to rise as cash sweep balances grow. In line with our annual trajectory of growth, ICA cash sweep AUM increased by $1 billion over the past 12 months. Within the quarter, ICA cash sweep assets declined by $800 million, which is consistent with our historical first quarter seasonality. With cash as a percent of total assets now approaching historical lows of 5.3% and cash sweep balances typically growing after the first quarter, we anticipate cash balances to increase throughout the remainder of the year. As interest rates normalize, our cash balances create significant upside. We are encouraged by the recent fed discussion regarding the potential for rising interest rates in the latter part of 2015.

Based on current balances and when the fed fund rate reaches normalized levels, this will begin to unlock as much as $255 million in adjusted EBITDA or approximately $220 million in pre-tax earnings after factoring in rising interest expense related to our floating interest expense on our debt.

I'd like to now focus on expenses including our payout rate and trends in our core G&A and promotional expenses. In the first quarter our payout rate grew to 86.4%, up 38 basis points over the first quarter of 2013. 16 basis points of this increase is related to marking-to-market our adviser equity program expense, which was $1.4 million this quarter driven by our share price increasing by $5.49. Our base payout rate and production bonus remained consistent with our first quarter 2013 results at 85.7%.

Core G&A expenses in the first quarter were $162 million, up 11% year-over-year, but down 3% sequentially. Expenses were at the high-end of our guidance this quarter primarily due to elevated regulatory and legal related costs, which we have indicated in the past as a potential cause of variability in our results. Overall, we continue to track to 4.5% core G&A growth for the year within our targeted range of 4% to 6%. Looking forward, regulatory costs remain a source of uncertainty due to increased oversight in our industry from the SEC, FINRA, and State Securities Regulators. If elevated legal and regulatory expenses emerge as a persistent feature of the operating environment, there is a potential that our core expense growth could increase towards the upper half of the range for this year.

Turning to promotional expense. As expected, the cost of conferences were up by $3 million related to our annual Summit Conference for top producers that occurred in the first quarter. We anticipate conference expense will grow an additional $3 million in the second quarter due to the hosting of our larger Masters Conference. Increase in conference expense was offset by lower transition assistance, which decreased $2 million over the fourth quarter. This was primarily due to lower levels of recruiting activity as Mark referenced. The cost to recruit advisers remains consistent as we continued to invest on average between 20% and 25% of an advisor's trailing production to attract new business.

GAAP expenses that are excluded from our adjusted EBITDA results were $18.8 million this quarter. These expenses primarily consist of employee share-based compensation and restructuring charges in addition to $5 million related to parallel rent and facilities expense with the opening of our new office tower in San Diego. In the first quarter, adjusted earnings per share grew to a record $0.69 representing a $0.05 or 8% growth over the first quarter of 2013. Cash sweep revenue continued to be a headwind on earnings growth and our margins.

That said, we feel very good about the drivers of growth that are recurring in nature and will contribute value in the future such as expanding advisory revenue and asset-based fees and lowering our share count by 4 million shares.

Margins excluding cash sweep revenue were flat compared to the first quarter last year, primarily due to the year-over-year core expense growth rate of 11% being in line with revenue growth of 12%. As we expect to see expense growth rates moderate on a year-over-year basis as 2014 progresses, we see improving conditions to deliver margin expansion.

I will now turn it to our capital management activity. Our strong cash flows this quarter enabled us to deploy available capital across many opportunities. We invested $23 million in capital expenditures and paid $24 million in total dividends while conducting $100 million of share repurchases buying back 1.9 million shares from TPG in February. This repurchase will ultimately offset the $800,000 in equity awards issued in the first quarter of 2014 and will reduce shares outstanding by an additional 1.1 million shares.

Our overall share repurchase strategy is designed to at a minimum repurchase enough shares to offset the dilution from annual equity awards. Additionally, we look to make opportunistic share repurchases, which reduce our share count. Looking forward, driven by our belief in the strong long-term earnings growth of our Company, we believe share repurchases will continue to generate value for shareholders. The pace at which we buy back will be influenced both by our evaluation of alternative strategic investments such as acquisitions and investing in our business and our desire to retain a minimum of $200 million in cash available for corporate use. Long term we still intend to commit approximately a third of our available capital to dividends, a third to capital expenditures, and a third to discretionary opportunities including share repurchases.

With that, Mark and I look forward to answering your questions. Operator, please open up the call.

(Operator Instructions) Chris Shutler, William Blair.

Let's see, this is probably for Dan. So the transaction and fee line in the P&L, it looked like it was up less than 1% year-over-year. So help me think about that as a seasonality and just how it should be trending for the year?

Chris, you're talking about transactions relative to revenue?

Transaction -- yes, correct.

There's several sources of revenue in that line item, right. One is just the transactional activity that occurs associated with advisors investing their clients' resources or money. The second place that occurs is just fees associated with advisors pay to us whether it be technology fees, association fees, et cetera. And I think again that's primarily driven by the transactional activity that occurs inside a period for the quarter as well as just the growth in the advisors with the changing number of advisors that occur on a year-on-year basis. And you'll have to remember that the comparison on a quarterly basis prior to the 2013 first quarter had a large elevation in terms of activity.

In the first quarter of 2013, as you'll remember, we had kind of the unlocking of investor engagement because of the clarity around tax policy and that created a bit of a deflated activity, if you will, from tax activity in Q1 of 2013. You also have the conference fees that fall into that line and the biggest difference is you had the Masters Conference and the Summit Conference, which was flip-flopped last year and the Masters Conference is a larger participation than Summit so you've got roughly about a $3 million differential in the cost of those conferences. So, those are the primary drivers.

Okay. That makes sense. And then totally unrelated, but I noticed the number of hybrid firms was down quarter-over-quarter, which I think makes the growth in the assets on the hybrid side even more impressive at $4.4 million. So, can you just talk about those two trends and exactly what you saw in the quarter?

Yes, sure. So from just a pure growth standpoint, I think we've got a typo in the numbers relative to fourth quarter numbers in terms of number of firms affiliated because we actually did see sequential growth. And Trap, do you know that number?

I'll follow up with that.

Okay. We'll follow up with you. But there's a typo there because there definitely is strong growth there both from an asset standpoint as well as advisors supported and the number of firms that are affiliated with that business model (inaudible).

We certainly, Chris, wouldn't have said that we went down in RIA in terms of this last quarter at all and that's --.

I think Chris, we had as much as 10% sequential growth in asset in that business line or from the fourth quarter.

Bill Katz, Citigroup.

Just coming back to your commentary opportunity within financial institutions, what percentage of this particular quarter's growth came from that area? And how quickly could you migrate to some of these loan-relied opportunities in terms of revenue capture or FA capture?

Couple things is that we have seen what I would describe as increased growth in the use of advisory platforms, but it wouldn't have represented a huge percentage of this quarter's gain in the advisory assets, because it's still -- I don't see -- it's such a relatively small segment, it's 80ish billion much, 90ish billion of the total assets that are there. So what we're seeing is as per your acceleration point is we're going into the bank programs and credit union programs and talking to the program managers about educating and supporting their entire program advisors in making the conversion over to advisory assets. We're doing a lot of really good work at conferences with those folks as well and trying to move that migration along and if that's way they have feel come to what they want to do with the business. So, I'd describe that as something that we can accelerate further as we go along this year and next year, but I would describe that as sort of a certain state, you can only do so many of those at once, really because of their own willingness to want to alter their program in some way.

What I think we can accelerate and we're trying with an experiment to grow faster is in the area of adding advisors into existing programs. That's very straightforward for a bank program. I have been in several meetings where they immediately agree that there is a need for more advisors and it's a matter of really moving them along. They do have some financial commitment they make to that advisor joining their bank. They're an employee of the bank so there's expenses related to that. So they have to feel comfortable they are making the investment.

What we're trying to do is experiment with two things, one is we do the actual recruiting for them that we know works well. So, we'll continue to add more recruiters on our side to move those along faster. And then secondly, in some cases, we're trying to find ways to help finance the cost of that individual for the first couple of years until they get up fully to speed and those are some small scale experiments in the field this year, and if they work for them, expand them as we go into next year.

Just a question for Dan, just on the G&A discussion. Is your commentary about the regulatory pressure that could push it more to 5%, 6% range if that would persist. Is that idiosyncratic to LPL or is that more of a holistic view of what's going off the industry at large?

I think it's definitely more systemic relative to the entire industry. The scrutiny, if you will, relative to the regulators has just expanded across the whole industry, across retail products in general. I think we're just trying to correlate that and help you understand the potential of that should that scrutiny continue to evolve.

And I think there's plenty of evidence, so let me add a little additional color. An example would be some of the recent press coverage of brokers on the broker side of the industry with bad records that are in broker check. There'll be more than likely some activity by regulators to work on that and whenever we need to make a change like that across the industry, we all have to adopt new procedures, new policies that comes at a cost in terms of both human capital and from technology. High-frequency trading certainly a popular item of the moment, just a point after the callers, we do not receive any order flow payment for the firm. So, it is important to know that has no effect to us at all unlike some others in the industry, but what is important about our high-frequency trading, again it likely leads you to some changes in your technology and systems to deal with what will be likely new order flow or new market discovery data that's there.

It's well known that that the SEC is working on the CATS program, which is Consolidated Audit Trail for Equities and Other Securities, particularly equities. And as a member firm all members of federal will needed to add clear and better data into those initiatives. So these are just wide-reaching post-Dodd-Frank activities and we certainly support a well-regulated and well thought out regulatory structure that's there. We certainly have the scale to deal with that better than most as we think about how those changes come through the industry.

Joel Jeffery, KBW.

I think you guys said that roughly 35% of your client assets are fee-based products and that seemed to be a growing percentage. I'm just kind of wondering, how high a percentage could that get? Is there sort of any kind of natural limitation just based on your business that would prevent it from being the entire amount I guess?

Let me start and then Mark can add any color to that. As you said, today it's 35%. If you look back over last five years, that's moved up from the 27% to 28% range. So, you've seen a pretty material shift just in the last five years and what we've seen in the last couple of years is just the pace of new sales or think about new assets gathered the mix of that has accelerated even in greater to advisory products. in fact, I think this year, we're running in the 56% to 57% range in terms of new sales.

So, if you just do the math on that and you push that out over a three to four years, you grow that from 35% north of 40%. So, think about a 1% to 2% incremental increase each year. I think when you think about the opportunity set for how high can it go, certainly there's great demand at the investor level for that type of relationship and that type of orientation towards their relationship, the sheer responsibility etcetera that comes associated with an advisory account. If you match that with the efficiency gains the advisor gets from managing and supporting that type of business, well then you have the two parties that are well aligned that will help support that number continuing to transition on. So, I don't know Mark, if you have any additional color to that.

I think actually regulatory pressure is useful because, the world of an advisory account is a world in which it's done through being a fiduciary and the relationship. So, it's a principles-based regulation scheme as opposed to a rules-based regulation scheme. So, by definition, there's not as many rules that are so tied into the reporting that you have to do and how you have do it. So, I think there is an awfully large push occurring for advisors themselves that sees that, that world is a little bit easier to operate in. They of course highly align with our clients, because they're getting paid to increase the value of assets over time and they have a penalty if assets go down in value. So, that there is a nice alignment between the advisor and that client. So, there is an awful lot of good tailwinds in that world that will help us.

Just lastly for me and I appreciate the guidance and also the near-term outlook for alternative investment revenue, but I mean thinking about that going forward, you've had a couple of quarters where that was particularly strong. Is there anything on the horizon again, that would be sort of lead you to believe that that number could pick up meaningfully again or is this kind of a consistent run rate we should think about longer-term as well?

So, two things. One, we do monitor obviously the environment for potential schedules, liquidity events or where product manufacturers are considering that option and alternative and we do see some on the horizon in second quarter and third quarter that would tend to, as we've said, create a certain level of elevations similar to Q1 in second quarter and you could see a little bit more elevation in the third quarter. I think we're still trying to get clarity and make sure that those liquidity events occur before necessarily giving you any direction on that. But based on what we see out on the horizon, that is how I'd frame-up the next six months.

I think if you looked at it on a more permanent basis, the baseline AI production was always in sort of the 8% of overall product mix for commission-based business. We believe just with the low interest rate environment and the continuing expansion of the utilization of alternative investments that that baseline may be bumping up in the 10% to 11% range. It certainly will not sustain the level that we saw in third and fourth quarter where it was more in the 18% range. So, we do expect that the elevation to trend down as the year closes, then probably settle into a baseline that was slightly higher than what we historically seen in that 10% range.

Ken Worthington, JPMorgan.

First on the expense side, you've given color on the compliance and regulatory side. Is there any reason for the compliance and regulatory cost to actually go down from the levels they were this quarter. If the world is seeing more regulatory scrutiny if regulators are digging in more, it just doesn't seem like we should be thinking about 1Q moderating and if anything maybe the pace picking up, is that fair or am I off base in those comments?

So, as we look at core G&A over the remainder of the year, of which certainly the regulatory and legal-oriented expenses are part of core G&A, we expect that run rate to be level or directionally flat relative to Q1. And then that puts you in that -- it's still, as we've said, in that trajectory of a 4.5% increase in core G&A across the entire year.

The only thing I'd add is some (inaudible) costs are lumpier, they come in the form of either specific settlements like the one we had recently with FINRA. It would show up when they show up. And they're also what you might describe more there as really sort of the infrastructure cost of regulation. And I think what we've got in the P&L and Dan just did a good job of giving the 30,000-foot level where the numbers are going, but just in terms of managing that Dan covered is you've got the company putting a lot of investment in technology to make ourselves more efficient and to make ourselves better in customer service to our advisors. So, things like middleware investments and our operations groups, we know create a better outcome for the investors who work with the advisors we support. It creates a lot more efficiency for us in terms of headcount reduction and so forth.

We might then take some of that efficiency right and then turn around and put it into investments and technology or even people for other reviews of products. We recently established a variable annuity review group, which we've had essentially in the supervisory structure of the firm, but we set it up as a special product supervisory function, I don't want to too technical here, but what that means is you have a group that are really deep experts in VAs and do a review of those VAs over and above the normal process we have. It's similar to what we do for alternative investments and have been doing in the special products review groups there.

So that's a good example of a bit of a to and fro, where we gained some efficiency. We used some of that efficiency to go to profits and some of that efficiency to go back into investments in strengthening the regulatory environment, if that helps to them.

And then maybe Dan, on the service value commitment, can you just talk about what the goals are over the next one to two quarters in terms of expectations for that, what needs be accomplished, and then what will the impact be of that on the P&L? I know you gave guidance overall, but what are you trying to accomplish short-term and what does it do to expenses?

So, we have -- we achieved about $5 million dollars of incremental savings in 2013. Our target for this year is an incremental $10 million. Most of that savings is spread over the next three quarters and most of that is driven off of continuing to transition more jobs to an outsourcing solution and then successfully obviously, once you've completed the cut over, you're able to then recognize the savings. And so, that's the majority of the driver of the $10 million of incremental savings this year. We do have some technology and automation products that are -- sorry, projects that we're working on this year that we'll complete towards the end of the year, which will create savings opportunity as we move into 2015 where, because of that new automation, we will be able to eliminate as many as 90 to 100 jobs. The majority of those savings will show up in 2015.

Alex Kramm, UBS.

Just starting on coming back I guess to the strong advisory asset growth that you've posted here for the last two quarters, can you maybe break this down a little bit more so we can get a feeling of where this is all coming from? I guess how much of that let's say $4.4 billion is driven really by new advisors that you're attracting to the firm, how much is advisors doing a good job of selling advisory products or accounts, and maybe was there any detraction in this quarter also as you lost some advisors perhaps? And then related to that just real quick, is there actually a decent component in that number that is kind of like transitioning assets or I guess what I'm trying to say is are they actually assets where a broker will take something from his brokerage account actually sell it into or transition it to an advisory model or is most of that money actually all new money to the firm?

Let me give you a couple points and then, Mark, please add any color to that. If you break down the growth in advisory, which has been that 11% on an annualized basis over the past couple of quarters in advisory assets, about 50% comes from new advisors and roughly 50% from existing advisors. If you look at that across our hybrid RIA business model versus the corporate RIA model again over the last couple of quarters, that's been split about 50/50 in terms of the overall asset growth across those two business lines. And typically speaking, I think again, you have a good healthy mix of those assets that are gathered by our existing advisors where you'll see typically about 75% of those being new assets that are attractive from either existing clients or new clients that they acquire versus 25% actually being transitioned or converted over from brokerage accounts to advisory accounts. Mark?

I think the only color I'd add is I do think that we're seeing an acceleration in Q4 and Q1 I think will continue because of the success of our hybrid RIA platform with kind of 50% of the growth, that says a lot. Remember back in 2008, we didn't have one so you're seeing the benefit of that investment now really kicking in to higher growth, which is that's what we hoped for from my position and from yours. And the second part of it is I would say that it's also the development of a pretty broad range of sophisticated strategies for advisors to use. Not to get too technical, but you said sort of the self-help model that an advisor who makes their own investment decisions and implements those, including training.

Remember that we gave and really priced very inexpensively an enhanced trading tool this last year, which has traded over 1.5 million shares very rapidly. And so what we're seeing is that just makes it much more efficient for an office who is self-directed, if you will, as an advisor in making investment decisions, just makes your life easier. So, that means they can then spend more time working with existing clients and working on prospects to grow their business. We're seeing that happen to some degree here. And then the other place that we're seeing it is in the centralized platforms where basically as an advisor you can say I'm going to outsource that investment management choice and I've got I think six to eight different choices; LPL is one, the BlackRock is another, and many well-known names that are available to me to use for my clients.

And in that case, I'm not involved in the rebalancing it all and so outsourced LPL and we use our scale to make that very efficient. These numbers are directionally correct and roughly 22%-ish of sales in the advisory platform are now going to the centralized platforms and the balance are in the advisor as the manager model and that's significant because a handful of years ago, again five-ish years ago, sales in the central platforms would have been 2% or 3% that's there. So this is really us investing in the platform to create solutions that advisors find work for their clients to grow their business and allows us to make them much more efficient. That is right on our strategy and right on what we're trying to do to really build the business with advisors.

Great. That's great color, thanks. And then secondly, maybe a little bit more near term on the revenue line. On the commissions line, you gave obviously some color around alternative investment and that those should be somewhat flat. Can you talk about other things that we should be thinking about as we approach or as we are in the second quarter now? I mean it sounds like investor engagement or investor confidence is as good as it gets right now so I'm sure the selling environment has been pretty good, but it's tough to see that going much, much higher, I guess. And then secondly also, I assume that a lot of your end customers made a lot money and there could be some capital gains and taxes and so forth. So, just a couple of things that anything we should be thinking about in particular as we think about assets and commission levels in the second quarter that you would highlight? Thanks.

Yes, so you're right. With respect to Q1, I think the durability of the investor engagement certainly showed up especially with some of the headline noise that created short-term volatility and we're seeing that being translated into good strong advisor productivity. We're seeing that momentum continue into second quarter so we're certainly encouraged by the level of advisor productivity that we're seeing. I think if you look across different products, we think there's opportunity to continue to see some growth in the variable annuity product line as many of those product manufacturers now that we have a 10 year treasury that is in the range that is allowing them to reinvest in their products, to re-engineer their products, create new features associated with those products, and even have the appetite for new assets.

We are seeing opportunity for growth along that particular product line, which is significant in the overall mix of commission business. So, I think that's certainly something to think about as we move forward.

With respect to the rest of the product lines, we've seen an interesting mix in growth in fixed annuities because again the change in the interest rate has created a greater gap in the yield fixed annuities have the offer relative to other comparable bank products. And so, we've seen good momentum in growth and expect that to sustain itself and that's the product line that actually we see good growth prospects in the IS channel or institution services channel because of the nature of their investors. And Mark, anything to add?

No, I think that was a (inaudible). You would agree that all trees don't grow to the sky, right. So, I think there's a reasonable amount of growth that engagement represents. But we shouldn't forget how low we went and the need for investors to really position their portfolios for retirement and very long-term items and that is the source of it. And also remember that our business because we have so many middle-class Americans in it does act a bit more like a 401(k) business where these are regular savers; out of every paycheck they're putting some amount of money away, out of every month they're putting some amount of money away, when they may get bonuses either every six months or every year they're putting a chunk of that away. And that definitely drives ongoing activities in addition to just general business growth for the advisor. So, I think that mindset is maybe helpful to understand fully as well.

So to summarize, don't expect too many huge swings in the second quarter also I guess?

Fair enough.

Alright. Very good. That's great. Thank you.

Bill Katz, Citigroup.

Just a small modeling follow-up. Dan, I think you mentioned that part of the decline in the other revenue line was just due to some reallowance commissions from the non-traded REITs. I think that's been said, I apologize; but what percentage of the $16 million you reported this quarter is actually related to non-traded REITs? I presume there'd be some lift to that if you're right on Q2 and Q3 levels bumping up a little bit so I want to see what's more sustainable underneath that?

And you're right, Bill, if you look at this sequentially, it was off $5 million to $6 million. If you look at just the elevated level of alternative investment sales, it caused a headwind of $5 million to $6 million quarter-on-quarter. I don't have the exact number, but we're happy to --.

And a proxy number would be roughly 80% of all of our alternative investments are non-traded REITS. And so therefore, by far the vast majority of any variability in that number is going to come from non-traded REIT sales.

And there's other things and other revenue as well so that's why it's not quite that clean, but directionally, it's in the $10 million to $11 million range.

Okay. That's helpful. Thanks for the extra color.

Chris Shutler, William Blair.

On the alternative sales, I just want to make sure I have the numbers right because I know you've said this a few times. So doing the math so were alternative sales in the quarter commissions about $61 million, $62 million?

So Chris, if the baseline was typically $40 million, which is what we said going into third quarter and fourth quarter of last year where we saw as much as $40 million of additional sales in the third and fourth quarter. This quarter we saw more in the range of $15 million to $17 million. So, you're directionally close.

Got you, okay. And then you said flattish in Q2 relative to Q1 and then trending down to 10% to 11% in the back half of the year?

That's right. With the exception of third quarter, you may actually see more in line with first and second quarter because there is liquidity event that's been planned and it's just sometimes hard to know exactly how much of those assets will be repositioned and whether or not they ultimately come about and they do it in the timeframe that they expect. So, I would think about third quarter right now being more in line with first and second quarter.

I think what will be helpful for all listeners and Chris, for your question is that there's two ways of course alternative investment sales and products show up for us. One is just the ongoing creation of a new set of products in the right part of the cycle, right, and we're in a particularly nice part of the cycle for real estate investments really across the board. I think we all see that in a much different way. That's kind of a steady state. All we were doing was that you wouldn't see this kind of volatility, but that's the history is like for us. The new phenomenon that's occurring is the listing of these what were previously illiquid REITs going into listed status.

And what's helpful for me to think about that is it's just like the IPO market, right. The market conditions have to be right for them to be able to take that out to the public market and therefore, we get a lot more volatility because you could have an offering that was slated to go in first quarter that suddenly now gets pushed to second quarter and gets pushed to third quarter much like an IPO does. So, that's the environmental factor for what is a relatively new phenomenon in these markets, which are illiquid non-traded REITs going to the public markets to create liquidity, create a pool of investable cash for consumers to recirculate in some way, some of which ends up in other non-traded REITs and some of which ends up in other products overall.

And then one more if you don't mind. So the non-cash transition assistance increased I think $1.6 million quarter-over-quarter. Just looking back historically since you've been disclosing that metric, it looked like a pretty big jump relative to past quarters. So just curious what was going on there, particularly given your recruiting numbers, which I recognize were held back by one large bank.

And so Chris, there's two drivers of that. The amount of loans continues to grow so some of that's just lagging or continuing to ramp up that number. A big piece of it though is reflected in the mix of business that occurred late in the third quarter and fourth quarter in recruiting. Remember we had a big bank that we recruited in September that associated with that came a much bigger mix of loans used for transition assistance, forgivable loans versus just the cash up front. In the fourth quarter, we continued to see that trend and so that's what you're seeing show up now in Q1.

Alright. Thanks, guys.

Alex Kramm, UBS.

I guess drag it out a little bit longer, right, I mean nobody wants to go home. So just maybe following up on the transition payment, I think you said there they seem to be stable in that 20% to 25% range. But can you maybe make a general comment on competition for advisors in general what you're seeing? I hear anecdotally that just the amount of incoming phone calls to like brokers, like postcards they get and things like that has been going up again. So do you see the same things? Is there more competition, is there more [hot] market, or is that maybe not representative of what you're seeing out there?

With 12 years' experience here, right; this is Mark; is it feels like what happens after you've had a market downturn followed by a market upturn and advisors are over kind of the busy period that we saw them in last year and a little bit this year. And now what they're doing is going okay, I've got my staff pretty much where I need them, I'm used to this new volume, I'm liking it, and oh by the way my numbers look fabulous, and so I've been thinking about moving and now I think I'll move. So, we're seeing our pipeline from our marketing efforts like those postcards and other really wonderful things that we do that are really climbing and that gives us lots of positive feeling about future growth of new advisors joining us, whether they're in financial institutions or whether they're independent or whether they're hybrid RIA.

And so, we certainly would feel our competitors are probably seeing something similar, but we do think that our results have shown consistently as you know we're the market leader for I think three years in a row now in terms of net new advisor adds.

So, we're going to be the winner anytime that churn churns up. Also remember that in the work done by a consultant asking advisors who they would most likely go to, we are the Number 1 firm they would like to be at if they weren't at the firm they're at today. That's a really strong position and when the market churns more, we're going to benefit more than our competitors will.

So, is it competitive out there? Absolutely. Are we seeing some good offers by our competitors to people in motion? Absolutely. Are we seeing them raise prices a bit in terms of movement of transition assistance? Absolutely. And I could tell you the same story for 2005 and for 2007 and so forth and we always find a way through to get more than our fair share.

Great, helpful. And then just lastly and then we can all go home, but I think M&A was a topic that we didn't really discuss today. So just curious I mean you talked about the higher regulatory costs in the industry and everything so it seems like this should be the environment where some of your competitors might still say like I've had enough. And so just looking forward in terms of scaled acquisitions, is that still something that you're thinking about? Are there candidates that you're talking to and like is the number increasing or are you still more focused on things like hey, maybe there's really something we would more likely look at that adds new products or new vertical or something like that? So, what's the latest thinking there?

That's a great and rather complex question. So let's take your last part of that first, which is we're really interested in acquisitions that are purely additive to the base. We're not particularly interested in acquisitions that are outside our current footprint. That was the phase we were in before and that's when we bought Fortigent, National Retirement Partners, and Concord because they were really good ways for us to enter into new adjacencies in the marketplace and you can now see we're using some of those acquisitions to build out our offering in the [bankwallet] space as an example.

So, I don't really see that and we don't see it as a strategy matter that those adjacencies we really need to do any acquisitions where we're in the spaces we want to be. So therefore, that leads us to what I described as the core acquisition just as you said it; a broker dealer that comes up for sale, we always look.

We have a very clear acquisition model, which is your firm is going to join our platform because that's how we get scale and sometimes that's a popular choice, but sometimes it's not for someone who is selling, but that is the way we do it.

And secondly, we are very particular about getting a good return on capital, I'm sure you're thrilled to hear that. I know I'm thrilled to hear that and I would say that we're particular in a lots of ways meaning that if we wouldn't take an advisor in organic underwriting or recruitment, we will not take them through acquisition. And so when we look at a property, one of the first things we look at are the records that are there and if it's filled with lots of records that are people we wouldn't take, then that means they're going to have to go away with the acquisition so it doesn't make it a particularly good return on our capital.

So, we're interested in acquisitions and we continue to look at them when they come along, but we're going to be guided by making sure that we can feel very comfortable we're going to get a decent return on the capital that needs to be there and I think that's really philosophizes our structure.

We do believe that the M&A market continues to pick up for exactly the reasons that you stated and for the same reason advisors are moving as these businesses have recovered from a pretty ugly downturn and the numbers look much better in 2014 and 2015 than they did in the previous two years and that likely means someone who was thinking about selling may very well move themselves along to get that done.

So, we'll continue to look vigilantly and we do think that's a good use of shareholder capital. But just to completely answer your question, of course, the very best thing we do is organically grow. So if we have opportunities to use transition dollars either in direct payment or in loan structures, we want to do that because we know that is a heck of a return for our shareholders and a really good way for us to grow pretty consistently.

Excellent. Thanks for all the answers tonight.

Thank you. I'm showing no further questions at this time.

Alright. Thanks, everyone.

Ladies and gentlemen, thanks for participating in today's conference. This does conclude today's program and I'll disconnect. Have a good day, everyone.